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06/12/2016

House of Lords praises Capital Markets Union

UK & Europe

House of Lords praises Capital Markets Union

Lord Jonathan Hill

[European Commission]

The House of Lords welcomed plans for a Capital Markets Union on Thursday (19 March), calling it “a major engine for stimulating growth.”

In a report called Capital Markets Union: a welcome start, the Lords said CMU could unleash cross-border capital for investment in infrastructure and local small to medium-sized enterprises.

There was, however, too much of an onus on the companies themselves to seek support, and the broad definition of what an SME is mean not all would benefit from CMU, the report said.

The creation of the CMU is a major pillar of the co-called ‘Juncker Plan’, which seeks to restore growth to the EU. CMU aims to make it easier to invest capital across borders and diversify investments streams in the EU away from reliance on the banking systems and opening up opportunities for crowdfunding, angel investors, venture capital and corporate bond markets.

Currently four out of five SMEs in the EU receive all their capital funding from banks.

The Commission estimates that if EU venture capital markets were as deep as the US, as much as 90 billion euro more in funds would have been available to companies between 2008 and 2013.


The report called on the UK to use its expertise to lead the proposal, but warned each stage of its implementation needed to be “road tested” to ensure adequate protection for consumer and investors while not over burdening the market with regulation.

“For far too long in the EU we have been reliant on traditional sources of funding,” said Lord Harrison, who chaired the committee that wrote the report. “It is becoming increasingly clear that there is a huge opportunity that lies beyond the banking sector.”

“We also urge the UK, where capital markets are better established than in other Member States, to take the lead in spearheading this Capital Markets Union,” he added.

A Capital Markets Union would make it easier for cross border, peer-to-peer lending and crowdfunding, diversifying access to finance.

“Of course we need to tread carefully – a move to more diversified sources of funding needs to go hand-in-hand with improved investor protection, and greater clarity for the consumer,” said Harrison.

“Overall we envisage that a robust, properly assessed Capital Markets Union could be a vital key to securing a long-term, sustainable economic recovery,” he concluded.

Vanessa Mock, a spokeswoman for the Commission said, “The House of Lords’ report will contribute to the public consultation that runs until May 2015. Our aim is to engage with many other national parliaments, governments, market participants and academics, so that their views can feed into our Action Plan later this year. The Action Plan will set the building blocks that we need to create a true single market for capital by 2019.”

Matthew Elliott, of the euro-critical Business for Britain stated: “Capital Markets Union could be a boon to the city, but only if it liberalises rather than regulates.”

Despite the merits of the idea, said Elliot, there were still major obstacles ahead. “CMU could expose future investors to a litany of unforeseen risks and further complicate the debt market. In particular for a true ‘Capital Markets Union’ to take shape, member states’ rules on issues such as taxation and insolvency law would need to be harmonised, something Britain wouldn’t and shouldn’t sign up to.”

“Small businesses are finding it harder and harder to access bank lending, so we need to open up alternative sources of funds from across Europe,” said Roland Rudd from Business for New Europe, a pro European business lobby. “As the House of Lords report rightly shows, Britain can and should play a leading role in this ‘major engine for stimulating growth’. Our national expertise in financial services will be much in demand across the continent,” added Rudd. 

Lord Hill has said he hopes to have the structure in place for a functional CMU by the time he leaves office in 2019. 

Background

In February 2015, Lord Jonathan Hill, Commissioner for Financial Stability, Financial Services and Capital Markets Union, unveiled a green paper as part of the process to establish a Capital Markets Union.

The aim is to develop a financing system to complement the banking system, unlock capital across Europe giving more investment choices, and establish a market whereby investors can use their funds across borders without hindrance. 

Further Reading